Paytm Money Review and it’s Demat & Trading Account Services: Recently Paytm announced its entry into stockbroking through the launch of Paytm Money. The discount broking segment which Paytm enters involves only executing orders on behalf of the clients has become synonymous with online broking.
Despite its widespread acceptance in the brokerage community it still can be debated if entering this segment was wise. This is because less than 5% of the population of the country is currently involved in the stock market. In addition, the segment already includes players like Zerodha, ET Money, Groww, Kuveram wealth, Angel Broking, Sharekhan, etc. Today we discuss this move and the features brought to the table by the new product.
Why has Paytm entered stockbroking?
Paytm received the approval from the SEBI in 2019 in order to enter the stockbroking segment. Paytm over the years has tried to establish itself as the one-stop platform for anything money-related in the recent past. After gaining traction post demonetization the online payments platform offered banking services, mutual fund, SIP, pension products. They also have acquired Raheja QBE in its plans to enter the insurance segment before expanding into the discount broking.
Paytm’s plans to enter stock broking couldn’t have come to fruition at a better time. In the months of April and May, NDSL and CDSL saw an addition of 2 lac and 12 lac new Demat accounts respectively. The lockdown imposed due to the COVID-19 pandemic has forced the work from home model to be adopted. This has led to an increase in the first time investors flocking to the stock markets with the added disposable income, as they as they are forced to spend less on leisure due to the pandemic.
The markets too favored the entry of first-time traders as after the steady fall from Feb-March the markets rebounded gaining over 45%. This allowed new entrants to gain profits making trading all the more attractive. In addition, the added information availability in the new environment has made it easier for new entrants to learn the trade.
Paytm Money, however, has not set the existing trading community as the only probable consumer base. India is expected to have 44 crore smartphone users whereas there currently exist only 1.2 crore active traders in the market. Paytm predominantly functioning on smartphones will have multi-folds of unexplored markets available for them. Paytm Money which has investors from over 98% of the pin codes in India will have the added advantage due to this existing under penetration in the country.
— Zerodha on Paytm
Zerodha which currently dominates the market with 3 million customers and a 15% share last year made a profit of over Rs.1000 crores. Nithin Kamath, CEO of Zerodha, commented on its new competitor saying,
“The big problem in India to solve is to grow the capital market ecosystem. While it has increased over the last six months, there are 90 lakh Indians who invest in the stock market. There is another one crore more who can enter the market. For that one crore to come, you need platforms with great distribution capability Paytm is one of those who can. If anyone in the country can expand fast, I think Paytm can do that.”
Paytm Money Review – Delivery and Intraday Charges
— Paytm Money Delivery Charges
Charge
Delivery Rates
Brokerage
Rs. 0.01/- per executed order
Exchange Turnover Charges
0.00325% of turnover for NSE and 0.003% of turnover for BSE
GST
18% on Brokerage and Exchange Turnover Charges
Security Transaction Charges (STT)
0.1% of turnover on buy and sell orders
SEBI Turnover Fees
0.0005% of turnover
Stamp Duty
0.015% of turnover on buy orders
— Paytm Money Intraday Charges
Charge
Intraday Rates
Brokerage
0.05% of turnover or Rs. 10/-, whichever is lower
Exchange Turnover Charges
0.00325% of turnover for NSE and 0.003% of turnover for BSE
Paytm Money Review – Attractive features offered by Paytm Money
One of the most attractive features comes with the attractive prices offered by Paytm which even trump many market leaders. They offer the lowest charges on intraday trade which is at Rs. 10 per trade.
The app also provides in-depth financial and historical price data for every listed company which enables investors to research the stock market on their own.
Using the Smart Search and notification option the users can discover and set alerts for as many as 50 stocks and get notified when the price is reached.
The app also has the added advantage of offering not only stock and derivative trading options but also offers other mutual funds and National Pension Scheme products.
The app also includes a built-in calculator that enables users to find out the transaction charges and know the precise breakeven price to sell the stocks on profit.
Users can automate stock investing by setting buy orders on a weekly or monthly basis.
Advanced charts and other options like cover order and bracket order have been offered in order to make the experience more rewarding
The brokerage fees for the segment futures are the same as those for intraday. The options brokerage offers flat Rs 20 per trade regardless of the number of lots.
Delivery segments allow the transactions you are brokering shares today on another day. No additional charges are made for these, where no purchases and sale is made on the same day.
Another advantage that Paytm offers will be with respect to data security. Paytm being in the digital walled industry comes with absolute data privacy to keep investor data safe with bank-level security.
Opening a Demat Account with Paytm Money?
Opening a Demat or Trading Account using Paytm Money can be done within 24 hrs by the following steps:
Download the Paytm Money App
Click on complete your KYC by filling in the required information.
Upload the documents i.e. PAN, Aadhaar and bank details (Cancelled cheque/Account statement)
Submit and You can start trading/investing once your account is active
Pricing comparison between Paytm and Zerodha
Activity
Paytm
Zerodha
Account Opening
Rs. 200 - One time Digital KYC + Rs 300 Account Opening Charges
Rs. 300 ( Equity and Commodity)
Delivery Charges
Rs. 0.01/- per executed order
FREE
Intraday Charges
Rs. 10 or 0.05% of turnover
Rs. 20 or 0.03% per trade
AMC (Account Maintenance Charges)
Rs. 0 *
Rs. 300/ year + GST
Pledging Charges
Rs. 32 (including the depository transaction charges)
Paytm money stockbroking and it’s demat & trading accounts are still in the early phase and yet to be tested customer’s feedbacks and expectations. Anyways, here are a few limitations of Paytm Money that it is facing or will face in the future:
Paytm Money doesn’t offer to trade in derivatives i.e. futures and options trading yet.
Unlike the trading platforms like Zerodha ‘kite’ which has been in the market for years, Paytm’s trading platform is yet to test handling large volumes and market volatility.
Other Services like Commodity and currency trading is not available for customers.
Closing Thoughts
By venturing into stockbroking Paytm has now become one of the most comprehensive wealth management platforms in the country. Their extensive existing customer base acts as their biggest leverage as they have access to the market not penetrated by other platforms. This can also be seen in the app which has a UI that is friendly and minimalistic, enhancing its approach.
Comparing Paytm to market leader Zerodha, the former makes financial inclusion a priority to suit its customer base. Zerodha on the other hand according to CEO Nitin Kamath caters to people who are more than just investors by offering a more evolved product.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
Understanding the pros and cons of Investing in Foreign Stocks: Indian investors have always been known to be inward-looking. That is, they would prefer to invest in the Indian markets over foreign ones. This has been the case even though it’s been over 15 years since they were first permitted to invest in foreign equities.
One of the major reasons for this has been the fact that India being a developing nation has an economy that grows faster than many developed countries. Today we discuss the possible benefits that an investor may receive while investing in foreign markets and also the limitations of doing so.
Benefits of Investing in Foreign Stocks /International markets
1. Diversification
Generally, when we talk about diversification we generally refer to investing across various industries and different MCAP’s. But by investing in foreign markets we can receive the same benefits of diversification even if the companies that we include in our portfolio already exist in the same industry or MCAP. The main purpose of diversification is to protect the portfolio. By investing abroad the portfolio is safeguarded from any domestic risks that might affect the domestic markets as a whole.
2. Market rebound rate
We earlier mentioned that that Indian investors prefer to invest in Indian securities as they provide a better growth rate. Markets around the world at times undergo crises at the same time. Rare as this should be this has already occurred twice post 2000. Keeping the growth rate aside let us try and notice the performance of markets post such crisis.
The Recession of 2008 saw economies stagnating all around the world. Even though they were first triggered by problems in the US, the Indian economy too suffered from the crash. The Indian markets suffered a fall of 55% compared to the heights it touched at the end of 2007. It can be noticed that the period of December 2007 to December 2013 the Indian markets gained only 4.3% after rebounding. Let us compare this to the US markets. During the recession, the US markets fell by about 50%. But during the same period from December 2007 to December 2013, the US market provided close to 50% returns after rebounding to previous levels.
Let us also take the 2nd instance where we have seen markets all around the world contract. This has been due to the pandemic that we are still suffering through. If we notice the US markets since their heights in February we can see that the markets fell 30% by March but have already rebounded and touched new heights gaining 15% returns. The Indian markets, on the other hand, suffered a fall of over 35% and have still not previous levels.
3. Exposure
Another added advantage of investing in foreign markets is the exposure an investor will receive in terms of securities available to him. Let us dial back time to the early 2000s and observe the options available to Indian investors when it comes to technology-driven securities. They are limited to TCS, Infosys, and Wipro.
On the other hand, foreign markets provided the likes of Apple. Microsoft, Google. At times even legal jurisdictions bar from certain companies to operate in a country. Investors, however, have the option to simply invest in foreign countries.
Risks involved while Investing in Foreign Stocks
1. Currency Exchange
One of the major problems investors face is due to the changing exchange rates. International stocks are priced in the currency of the country they are based in. For an Indian investor, this causes is a problem because he is now not only exposed to the uncertainty of the stock but also the uncertainty of the currency.
Take for example the shares of ABC Ltd. in the US are worth $100. After the purchase is made the stock rises to $110. But at the same time, the dollar weakens by 15%. If a domestic investor sells off his position and converts it to rupees he would not only forgo the 10% gain but also suffer an additional 5% loss due to the exchange rate. But with the added risk there also exists the added opportunity of making gains during the exchange. If the rupee weakens in the above case, the investor would walk away with a 25% gain.
2. Taxability
The gains that an individual makes from foreign investments can be taxed twice. First when the shares are sold in a foreign country. And secondly in India. This, however, depends on whether the individual is considered as a resident or any other status. The rates applicable here will depend on whether the gains are considered as Long term capital gain or Short term capital gain depending on the period the asset was held. This is known as Double taxation.
This can be avoided if there exists a tax agreement between the foreign country and India. This tax agreement is known as the Double Tax Avoidance Agreement. India currently has DTAA with more than 80 countries, including the US, the UK, France, Greece, Brazil, Canada, Germany, Israel, Italy, Mauritius, Thailand, Spain, Malaysia, Russia, China, Bangladesh, and Australia.
3. Political Unrest
When investing in a foreign country the investor must be aware of the potential political risk. This makes it necessary that the investors follow up on major political events such as elections, trade agreements, tax changes, and civil unrest. A country with unfavorable factors makes investing there not worthwhile even if the company is a good performer.
4. Lack of regulation
Investors looking to invest in foreign markets must be aware that foreign governments may not have the same level of regulations that are followed in India. They may have different disclosure and accounting rules followed respectively. This makes it harder and time-consuming for investors to keep up with the inconsistencies that of regulations in different countries.
There exist numerous advantages and risks that exist while investing in foreign stocks. The existence of risks does not mean one should turn a blind eye to over half of the investment opportunities available to an investor. This is because a majority of such opportunities exist in foreign markets.
Investors should, however, pick an opportunity where the risks are considered and assessed and still remains attractive as an investment.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
A hand-picked list of the top 5 stock market investors in the world: Its been over 4 centuries since the inception of the world’s first stock exchange in Amsterdam. Since then there have been many investors- some known for their success and others for their ability to loose their massive wealth.
The list below includes investors that struggled through poverty, escaped the Nazi’s and even those that worked closely with spy agencies during the Cold War. An extremely interesting list to go through and even better footsteps to follow. Today we bring to you a comprehensive list of the top 5 investors of all time.
Top 5 Stock Market Investors of All-time!
5. Benjamin Graham
There are very few investors who have not only succeeded in their investment pursuits but also have successfully influenced multiple generations of investors at the same time. Any investor on this list cannot deny being influenced by Benjamin Graham.
Benjamin Graham was born to Jewish parents in England in the year 1894. Despite experiencing poverty first hand he graduated from Columbia University on a scholarship and went on to work in Wall Street. By the age of 25, Graham was earning $500,000 annually in the 1920s.
— His transition into an Investment Guru
But he soon lost almost all of his investments during the stock market crash of 1929. It was after this that Graham took the time to put the observations he made for investing in a book called Security Analysis while working as a lecturer at the Columbia Business School. It was in this book that Graham brought forward the concept of value investing, where investments are made based on the intrinsic value of the stock and not that of the market price.
But it was Grahams’ next book “The Intelligent Investor’ which is considered mandatory in every investors’ home. It was in this book that he introduced Mr. Market. Mr. Market shows up at every investors’ door giving them an option to buy or sell. But Mr. Market is often irrational and his emotions are run by greed and fear. Graham emphasized that i is necessary for every investor to do their own research and not depend on Mr.Market. According to him, a successful investor makes Mr. Market his servant and not his friend.
— Notable Investments
Grahams’ most notable investments include his 50% purchase of GEICO in 1948 for $712,000. This position grew to $ 400 million by 1972. His teachings and work inspired many notable investors like Warren Buffet, Irving Kahn, Walter Schloss, and Bill Ackman.
His book ‘ The Intelligent Investor’ is considered the bible for investing. Although it has been over 4 decades since Benjamin Graham passed away, his contributions still remain relevant and will continue to do so for the years to come.
4. David Swensen
Yale University, an Ivy League college, the third-oldest institution of higher education in the US was founded in 1701. Its alumni list includes 5 US presidents. Ever considered who is the highest-paid at Yale? Is it the University President Peter Salovey who is paid $1.4 million in 2015. The answer is ‘No’. The highest-paid employee at the school is its Cheif Investment Officer David Swensen who makes over $4 million annually.
— Early Career
Swensen himself is an alumnus of Yale and pursued a Ph.D. in economics. Before joining Yale as a Fund Manager, Swensen spent 6 years working at Wall Street. Advising the Carnegie Corporation, the NYSE, and also worked for the Salomon and Lehman Brothers. It was in 1985 that Swensen received the offer to manage Yale’s Endowment Fund which was worth $1 billion. Swensen was only 31 years old at the time, had no experience in portfolio management, and taking the job would mean taking an 80% pay cut. Suicide if you would ask anyone at the time.
Swensen, however, took the job. It was here that he along with Dean Takahashi invented the Yale theory. Swensen succeeded in implementing the theory and now is commonly known as the Endowment Model.
— The Endowment Fund
One may think that Swensen hit the lottery by managing the Yale fund. But to provide returns of the scale he did is nothing short of herculean. Especially due to the nature of the fund was made up of donations received by the university and hence require secure investments. The fund is also used to provide scholarships. All this on top of student protests over the choice of investments made that do not fall in line with the changing social causes. This forced Swensen to move away from investing in the companies that have a large carbon footprint.
As of 2019, the endowment fund was worth $29.4 billion. Second to Harward whose endowment fund is worth $39.2billion. According to former Yale President, Richard Lenin Swensens contribution to Yale is greater than the sum of all the donations made in more than two decades.
3. Jim Simons
Jim Harris Simmons was known to be gifted in mathematics from a very early age. He joined MIT at the age of 17 and went on to receive his Ph.D. in mathematics from Berkely at the age of 23.
— Early Career
He began working at the Institute of Defence Analysis, which was a branch of the NSA in the US. It was set to break Russian codes during the cold war. Simons states that he loved the job because it paid well and he was allowed to work on his personal math projects for half of the time. The work he did here remain confidential.
He, however, was fired after he expressed his views against the Vietnam War in an interview. He later went on to work at Stony Brooke University. Jim Simmons is famous not only in the world of investing but is also a highly acclaimed mathematician. He is noted for the Chern-Simons form which contributed to the development of string theory.
— Transition into an Investment Manager
Jim Simons’s first investment was from the amount he received at his wedding in 1959. He invested this in stocks but found it boring and later invested it in Soy-beans. It was only in the 1970s that Simons began taking investing and trading seriously. He took out his investments from his friends firm in Columbia and began trading with foreign currencies. He founded his own hedge fund Rennaissance Technologies and decided to crack the market y applying his mathematical skills here. Due to this reason, both he and his fund are called Quantum Investors.
His fund did not make good returns which led to him closing it for a year in order to figure out what went wrong and to restrategize. After opening again the Medallion fund went on to become to most successful hedge fund of all time. The fund gave a staggering 66% per annum returns and a net return of 39.1% after the huge investor fees. This made the Simons a billionaire and currently has a net worth of $21.6 billion according to Forbes.
Even though the strategy used has been released in a book all employees are made to sign an NDA agreement. In addition, they are also asked to sign a non compete agreement later on in order to keep the means used to achieve these returns within the company.
2. George Soros
Soros was born in the 1930s to a Hungarian Jew family. A terrible time for the Jews in Europe. His teens were spent escaping persecution by the Nazi’s during WW2. His family did this by changing their names from Shwartz to Soros and by masquerading as Christians. Soros went on to study at the London School of Economics after which he did several odd jobs before entering Wall Street.
— The man who broke the Bank of England
In 1970, Soros founded Soros Management where he managed the Soros fund. But it was only on September 16, 1992, that Soros rose to fame. For months leading up to this date, Soros built a huge sort position of 10 billion Pounds. This day was termed as Black Wednesday in the UK. Soros, on the other hand, made a profit of $1 billion on a single day. This came at a cost of 3.4 billion pounds to the Bank of England. Hereafter he was known as the man who broke the bank of England.
— Is Soros still infamous today?
In recent times too, unfortunately, Soros is known for all the wrong reasons. He is often targeted by the rightwing politicians and has often been the center of many conspiracy theories. This has been particularly because of his economical support to the Left and his charitable organization ‘Open Society’.
The Open Society has been accused multiple times of attempting to topple governments that oppose illegal immigration and the influx of Muslim refugees in Europe. Soros, however, claims that he founded the society to ensure the building of vibrant and tolerant democracies. Soros and his NPO are currently banned in 6 countries.
1. Warren Buffett
The brilliant track record and wealth that Warren Buffet amassed from investing gives him the number one spot undisputably.
Warren Buffet was born in 1930 to a future US Congressman, Howard Buffet. Despite this Buffet spent his childhood in poverty and so the importance of money was instilled in him at a very young age. This drove him to set the aim of becoming a millionaire by the age of 30 or jumping off the tallest building in Omaha.
— Early Career
The entrepreneurship spark and his obsession with numbers were visible in him from a very young age. He adopted a paper route when young and learned the benefits of diversification as he realized that he could make more money by selling magazines as well and made $175 a month from this.
Apart from this Buffet sold CocaCola, chewing gum, golf ball, stamps, and also worked at his grandfathers grocery when young. Buffets’ infatuation with numbers got him interested in the stock market and made the first investment at the age of 11. Warren Buffet filed his first tax return at the age of 14. At around the same time he also bought a farm. Buffet went on to buy 3 shares of the Citi Service for himself.
Although Harward would have been his first choice Buffet was rejected. He then went on to study at Columbia Business School because one of the investing greats Benjamin Graham taught there. After graduating he went and achieved one of his most prized possessions a diploma for a course in Public Speaking under the legendary Dale Carnegie. Warren Buffet then went on to work under Benjamin Graham under whom he grew as an investor.
Warren Buffet retired at the age of 26 after buying a house and having $174,000 in savings. But his dream of becoming a millionnaire brought him out of retirement.
— The Berkshire Hathaway Story
His investment strategy in the initial days included Cigarette Butt Investing. In 1962 this strategy led him to invest in a textile manufacturing firm called Berkshire Hathaway. He held the shares for 3 years but later came to terms that this was the worst investment he ever made. In 1964 the company made him a tender offer at $11.50 per share.
However, when Buffet received the offer in writing 3 weeks later the price was quoted at $11.375 per share. This $0,125 reduction angered him and he bought Berkshire Hathaway and immediately fired its owner Seabury Stanton. But after this, he realized that the business would not improve. He shut down the core business of textiles in 1967 and expanded into the insurance industry and investing.
Some of the other notable investments by Buffet include Washington Post, Exxon, Geico, and CocaCola. In 1979, Warren Buffet had a net worth of $620 million due to Berkshire Hathaway. He then set a new goal of becoming a billionaire. Buffet reached the goal when the shares of Berkshire Hathaway closed at $7175 on May 29th, 1990. As of 2020, has a net worth of $69.6 billion. In the world of investing Warren Buffet is nothing short of a rock star.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
Unwrapping Peter Lynch’s Investment Strategy: Peter Lynch was to the investing world what rockstars are to us. He is primarily known for his work at Fidelity Management and Research where he managed the Magellan Fund. This fund was launched in 1977 and ended when Mr. Lynch retired in 1990.
Even though 3 decades have passed since he retired, his work in Fidelity still astonishes investors as he grew the assets of the fund from $14 million in 1977 to $18 billion in 1990. With Lynch at its helm, the fund was among the highest-ranking stock funds throughout his 13 years tenure beating the S&P 500, its benchmark, in 11 of the 13 years.
Over the years there also have been debates on who was the ‘greatest investor of all time’ Buffet or Lynch? Clearly the 54 years Buffet spent at Berkshire Hathaway offering 20.9% annual return gives Buffet the greatest title. But Lynch achieving a 29% annual returns also provides solid arguments.
Just to put things in perspective a $10,000 investment that earned this return for 13 years would have grown to nearly $280,000. But it is not only this achievement that makes Lynch one of the greatest but also because he shares the strategy he used to achieve this in a simple manner gaining him considerable fame.
Peter Lynch’s Investment Strategy
Lynch was an institutional investor. Can his strategy be used for individual investors?
Lynch always believed that an average investor can generate better returns in comparison to professional or institutional investors like mutual fund managers, hedge funds, etc. This is because according to him individual investors hold a distinct advantage over Wall Street as they are not subject to the same bureaucratic rules.
Also, individual investors do not have to be bothered by short term performances. In comparison, professionals are answerable to their investors if a fund performs badly in a year. A justification saying “The assets are going through a phase and will perform better in the future” will not convince a fund’s clients.
Finally, individual investors also have the advantage of a smaller scale. It is easier to double $10,000 in the market than it is to double $10 billion.
Peter Lynch’s Investing philosophy
“Invest in what you know.” – Peter Lynch
Peter Lynch’s whole investing philosophy revolves around this. “Investing in what you already know about”. To support his argument he gives the example of a doctor. Say you are a cardiologist and are beginning your journey into the world of investing. Almost all of us have a fairly good idea of what companies like Mcdonalds and Nike do.
But would you have an edge by investing in these? Say, as required by your field you are made aware of a new heart pump being introduced. You being able to judge this will obviously be aware of the revolutionary effects the heart pump may have in saving human lives. Hence, in this case, your in-depth knowledge of the subject gives you an advantage while deciding if ever you could invest in the company or not.
Just like this, we may own experiences–for instance, within our own business or trade, or as consumers of products that provide us an edge to improve our investment judgment. Hence the quote “Buy what you know”. This is an advice that has also been advocated by Warren Buffet.
Sources that Peter Lynch Uses
The greatest stock research that we have at our disposal in order to identify superior stocks are our eyes, ears, and common sense. Also, Lynch does not believe that investors can predict actual growth rates, and he is skeptical of analysts’ earnings estimates.
Lynch was proud of the fact that many of his great stock ideas were discovered while walking through the grocery store or chatting casually with friends and family. Even when we are watching TV, reading the newspaper, driving down the street, or traveling on vacation just by noticing an investment opportunity we can do first-hand analysis over it.
Lynch is something of a ‘Story Investor’. Now that it is clear that Lynch advocates investing in what you know, and his initial research begins with his senses in the environment. The step that Lynch follows is that of finding a story behind the stock.
Often being engrossed in the investing world has led us to believe that stocks are nothing more than just a collection of blips on a screen or just numbers to be judged by ratios. But for Lynch, the stock is more than just that emphasis us to realize that behind the stock is a company with a story.
What is this ‘story’ Peter Lynch looked for?
According to Lynch a company’s plan to increase earnings and its ability to fulfill that plan is its “story,”. He lays down the 5 ways that a company can increase its earnings. Lynch points out five ways in which a company can increase earnings:
It can reduce costs.
Raise prices.
Expand into new markets.
Sell more in old markets.
Revitalize, close, or sell a losing operation.
Hence this is where is the advice of ‘Investing in what you know’ falls into place. The only way you can have a better edge to judge a company’s plans to increase earnings is if you are familiar with the company or industry. This will increase your chances of finding a good story.
For this reason, Lynch is a strong advocate of investing in companies with which one is familiar, or whose products or services are relatively easy to understand. Thus, Lynch says he would rather invest in “pantyhose rather than communications satellites,” and “motel chains rather than fiber optics.”.
How Peter Lynch Categorized Companies?
We may have come across several companies that may grab our interests after first-hand research. Peter Lynch suggests that in order to be able to judge their story potential better it is best that we categorize then by size. This will help us form reasonable expectations from the company.
This is because if the company is categorized by size we can then judge their ability to increase their value and hence their story. Large companies cannot be expected to grow as quickly as smaller companies. This will further help us decided if the expectations are what we would like to receive in our portfolio. According to him, the categorization can be done in the following 6 ways:
Slow Growers
Large and aging companies expected to grow only slightly faster than the economy as a whole. These generally make up for their growth by paying large regular dividends.
Stalwarts
These include large companies that are still able to grow, with annual earnings growth rates of around 10% to 12%. If purchased at a good price, Lynch says he expects good but not enormous returns–certainly no more than 50% in two years and possibly less.
Fast-Growers
Small, aggressive new firms with annual earnings growth of 20% to 25% a year. These do not have to be in fast-growing industries. Fast-growers are among Lynch’s favorites, and he says that an investor’s biggest gains will come from this type of stock. However, they also carry considerable risk.
Cyclicals
Companies in which sales and profits tend to rise and fall in somewhat predictable patterns based on the economic cycle; examples include companies in the auto industry, airlines, and steel. Lynch warns that these firms can be mistaken for stalwarts by inexperienced investors, but share prices of cyclical can drop dramatically during hard times. Thus, timing is crucial when investing in these firms, and Lynch says that investors must learn to detect the early signs that business is starting to turn down.
Turnarounds
Turnarounds are companies that were on the verge of bankruptcy but have been revived. This could be because the government bailed them out or another company made a strategic investment in them. Lynch calls these “no-growers”.The best example of such a company is Satyam. The stocks of successful turnarounds can move back up quickly, and Lynch points out that of all the categories, these upturns are least related to the general market.
Asset opportunities
Finding these hidden assets requires a real working knowledge of the company that owns the assets, and Lynch points out that within this category, the “local” edge–your own knowledge and experience–can be used to greatest advantage.
(Lynch would pick a David over Goliath company on any day)
The category an investor prefers for his/her portfolio may vary as per investor preference. But Lynch always preferred Fast Growers, this, however, came with considerable risk. To be more precise Fast Growers that are not from fast-growing industries.
This is because in contrast every stock in a fast-growing industry would be growing as well but not specifically because of the company. This growth is only because of investors Fear Of Missing Out due to a short hype in the industry. Over time, however, the high growth industry will also attract significant competitors. This will eventually lead to a drop in growth.
Lynch also coined in the term “Tenbagger” and these companies will clearly be found to be among the fast growers. Tenbaggers are stocks that go up in value tenfold or 1000%. These are the kind of stocks that Lynch looked out for when he was running the Magellan Fund.
The first rule that he set for the Magellan stock is that if one was identified to have the potential, then the investor must not sell the stock when it goes up 40% or 100%. Peter Lynch felt that this amounted to “pulling the flowers and watering the weeds.”
Evaluation and Selection of stocks
The simplicity of the strategy that we have gone through so far may lead us to believe that it is easy. But we are only halfway through the strategy. After classifying the stocks, we now come to its evaluation. Lynch was extremely dedicated when it came to researching. He always believed that the more he researched the greater were his odds of finding the best ones to invest in.
Peter Lynch follows what is called the ‘Bottoms-up’ approach. According to this every stock picked must be thoroughly investigated. Such analysis will expose any pitfalls in the story of the company. Also, it is important to note that if the stock was purchased at a too high of a price then the chances of making a profit will be reduced or wiped off. Hence it is important that the stocks are diligently researched and evaluated.
While looking at the company’s earning over the years one should try and assess if the earnings are stable and consistent. Ideally, the earnings should keep moving up consistently. Assessing the earnings over the years is important because this trend will eventually be reflected in the stock price revealing the stability and strength of the company.
— Earnings growth
It is also necessary that not only for the earnings to keep moving upwards consistently but also to match the company’s story. This means that if a company has the story of a fast grower its growth rate must be higher than those of slow growth rates. One must also keep an eye out for extremely high levels of earnings that are not consistent over the years.
This will also help us identify stocks that are overvalued as a result of attracting attention in that extremely high growth period. Investors here bid up the price. But if a continued growth rate is noticed then it may be factored into the price
— The price-earnings ratio
At times the market may get ahead of itself and overprice a stock even when there is no significant change in the earnings. The price-earnings ratio helps you keep your perspective, by comparing the current price to most recently reported earnings. Stocks with good prospects should sell with higher price-earnings ratios than stocks with poor prospects.
— The price-earnings ratio relative to its historical average
Studying the pattern of price-earnings ratios over a period of several years should reveal a level that is “normal” for the company. This should help you avoid buying into a stock if the price gets ahead of the earnings, or sends an early warning that it may be time to take some profits in a stock you own.
— The price-earnings ratio relative to the industry average
At this point, we may come across stocks that are undervalued in an industry. By comparing its P/E ratio with the rest of the industry we can figure out if it is because it is a bad performer or if the stock has simply been overlooked
— The price-earnings ratio relative to its earnings growth rate
Companies with better prospects should sell with higher price-earnings ratios, but the ratio between the two can reveal bargains or overvaluations. A price-earnings ratio of half the level of historical earnings growth is considered attractive, while relative ratios above 2.0 are unattractive.
For dividend-paying stocks, Lynch refines this measure by adding the dividend yield to the earnings growth [in other words, the price-earnings ratio divided by the sum of the earnings growth rate and dividend yield]. With this modified technique, ratios above 1.0 are considered poor, while ratios below 0.5 are considered attractive.
— The ratio of debt to equity
Lynch is especially wary of bank debt, which can usually be called in by the bank on demand. This is because a Balance sheet that does not have debt or minima debt will come in handy when the company chooses to expand or faces financial difficulty
— Net cash per share
Net cash per share is calculated by adding the level of cash and cash equivalents, subtracting long-term debt, and dividing the result by the number of shares outstanding. High levels provide support for the stock price and indicate financial strength.
— Dividends & payout ratio
Dividends are usually paid by larger companies, and Lynch tends to prefer smaller growth firms. However, Lynch suggests that investors who prefer dividend-paying firms should seek firms with the ability to pay during recessions (indicated by a low percentage of earnings paid out as dividends), and companies that have a 20-year or 30-year record of regularly providing dividends.
— Inventories
This is a particularly important figure for cyclical businesses. When it comes to manufacturers or retailers, an inventory buildup is a bad sign, and a red flag is waving when inventories grow faster than sales. On the other hand, if a company is depressed, the first evidence of a turnaround is when inventories start to be depleted.
Lynch keeps an eye out for ugly ducklings. These are companies that have a boring name or those that function in boring industries. He also considers companies that are in depressing and disagreeable industries. Examples being Funeral homes that are depressing or Waste Management which is disagreeable. Most investors invest in interesting companies like Tesla where cars are launched into space etc. But Lynch is aware that it is these ugly ducklings where their nature is reflected in the share price. This offers up good bargains
Spin-Offs. This is because investors are skeptical of spin-offs and hence receive lesser attention in comparison to the parent company.
Companies that operate in industries with multiple entry barriers. A niche firm controlling a market segment would be attractive
Companies that offer products that are a necessity. These companies provide stability as people tend to buy their products regardless. eg razor blades.
Companies that take advantage of technological advances in their industry but are not directly producing technology say like Google and Apple. This is because companies that produce technology are stock prices that are valued highly.
Companies with low analyst coverage as they are generally not priced too high.
The company is buying back shares. Buybacks are announced once companies start to mature and have cash flow that exceeds their capital needs. The buyback will help to support the stock price and is usually performed when management feels share price is favorable.
Characteristics Lynch finds unfavorable are:
“If I Could Avoid a Single Stock, It Would Be the Hottest Stock in the Hottest Industry.” Hot stocks in hot industries are those that attract a lot of attention in the initial stages due to its explosive growth. This growth, however, burns away as the growth achieved does not match the increase in price due to the added publicity. Over time it becomes clear that the company does not have the earnings, profits, or growth potential to back the buzz. Also as soon as a company with such hot stocks exist copy cats start to appear in the industry deflating the company’s stock value.
Companies that diversify into unrelated businesses. Lynch suggests staying away from such companies. Lynch calls this ‘Diworsefication’.
Companies in which one customer accounts for 25% to 50% of their sales.
Advice for new investors
Lynch suggests that for an investor who is just stepping into the stock market it is best that he starts off with a paper portfolio. And pick 5 companies to buy. Then he investor should ask himself why he is buying these stocks. Answers like “the sucker’s going up.” arent good enough of a reason.
And if the stock performs better for a period then he should again question himself. Why did it go up? Noticing the changes that occurred during this period is also what research is all about. One must also then notice what kind of stock is one good at picking. A person may have a better eye for cyclical while another may be good at selecting fast growers.
Lynch also lets us know that in the stock market it is not the brain that is the most important but the stomach. This is mainly because one must remain invested in stocks that are selected for the long term. There may be ups and downs on a daily basis and the waves of information made available to us do not help in this aspect. Hence being able to hear the news and still have faith in the stock for 10-30 years is necessary. Market falls occur regularly hence it one should have a significant tolerance for pain. Most people do really well because they just hang in there.
Even when it comes to professionals it is not necessary that those will grow multifold. Some may even make a loss.
“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”
A stock may lose 100% of its value but even one great investment that grows at 1000% of its value will not only make up for the losses also change your life. This shows that you don’t have to be perfect as an investor as a handful of multi-baggers can help you create all the wealth you need.
According to the results of the study, the investor who invested on the absolute high day would have earned a compounded return of 10.6% for the 30-year period. The other investor who invests on the lowest day of the year would earn an 11.7% compounded return over the 30-year period. According to this study, the investor who invested in the worst market timings trailed only by 1.1% per year.
This led Lynch to believe that it wasn’t worth it to run around figuring the right time to invest. This time would be better invested in focussing on what was important i.e. finding great companies.
When to sell your investments?
Despite Lynch being an advocate of long term commitment and not favoring market timing, he does not believe that investors should hold one stock forever. According to Lynch investors should keep an eye on their investments and review their holdings once every 6 months. One may not expect it but just like the buys the sales also depend on the story on the company. An investor should sell his stock if he feels that the stock has played out according to the story and its performance is reflected in the price.
Another reason would be that the story itself is changed by the company or the stock fundamentally deteriorates. Or else as long as the story is as expected a price drop would only mean an opportunity to buy more. Therefore you have to define when a company is getting close to maturity, and that’s when you exit. Or the story deteriorates. If the story’s intact, you hold on.
“A good stock can take several years before it really pays off. Give your investment time to grow. No one can tell you when the right time is to sell a stock. You need to have patience. If you are averse to risk, the stock market is not for you,”
Lynch also advocates for rotation selling. According to him once a stock’s story is played and the expected returns achieved the investor should sell the shares and replace them with those of another company with similar prospects
Closing Thoughts
Peter Lynch’s performance and stock-picking ability have set him, leagues, apart from most of his peers at Wall Street. The strategies that he has provided us with not only provide us with a fresh perspective towards the investing world. One which is generally considered to be simply mundane snd a game of numbers.
His last lesson, however, can be noted in his walking away from the mutual fund industry at the pinnacle of his career. Where he chose to use his wealth to live life to the fullest instead of simply chasing money.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
Demystifying whether you Should Invest During COVID19 times: Before we dig deeper into this topic of why investing is so important, let us try and understand as to what investment means. To put it in simple words, Investment can mean building something right now that will help your sustainability in the future. It is the stepping stone towards securing one’s future.
Moreover, investment is an ongoing and continuous process. And the worth of investing is understood more during the recessionary or pandemic e.g. COVID-19 times.
How is Investing different from Trading?
A lot of people lose money in the market because they trade in stocks confusing it as investing. There is a conceptual and structural difference between trading and investing. A few of the key ones are mentioned below:
Investing, in general, is targeted for a longer duration of time. However, trading is for a short duration of time (sometimes even for a few minutes).
While investing, the focus is to earn long term and sustainable gains, but in the case of trading, the focus is for short term gains.
Investors have set rules and goals for buying or selling. But, in the case of trading, the rationale behind a trade keeps changing from trade to trade.
The most important difference is the System. Investing is systematic by nature. The aim here is to have a gradual building of wealth over an extended period of time, by building a portfolio. It can be done via a basket of stock, mutual funds, bonds, or any other investment avenues. But trading follows only one rule i.e., the rule of short term gains.
Having understood the major difference between Investing and trading, let us understand as to why one should invest.
Should you Invest During COVID19 times? – Importance of Investing
Here are a few of the top reasons why one should invest:
To secure one’s Future: As we have already mentioned that investing is an ongoing and continuous process. And one does that to secure one’s own future. and we all know that the future is uncertain. But if we are able to financially plan our future, then it becomes easier to handle the tough times like the current global pandemic.
Investment compounds our savings: Let me explain this with the help of a simple example. Say, if we start an investment with an annual capital of Rs. 2,00,000 and if we do that for 15 years. Let’s say if the annual return on investment is 12% p.a. Here, the compounded value of the investment after 15 years would be Rs. 1,63,39,747.
Retirement Planning: This is one of the major reasons for investment for most people. As most of the people depend on salary for their livelihood and which is why investment becomes more pertinent. Lifestyle maintenance, when one does not have a job can only be possible with proper planning and investment
Planning future events: This is one of the most important benefits of investing. If we have some major expenses (children education, or marriage) a few years down the line. The expenses can be ascertained and proper financial planning can be done for them
Fulfilling one’s aspirations: As the good old saying goes, “If you don’t aspire, you are not living”. Therefore, to be able to fulfill one’s dreams (buying a house, international vacation, etc.) and aspirations, proper planning, and the right investment is a must. And the functionality of compounding also helps in swelling up the investment and meeting one’s goal
Why start Investing during Pandemic (COVID-19)?
As we can see the world economy has been struggling during the pandemic. And with most of the economies posting with near zero or negative GDP growth rate, the investing has become more lucrative. The following are some of the reasons to start investing right now:
The investment avenues are available at a cheaper cost. Say, if I have to buy shares of the blue-chip companies. They are all available at discounted prices and once when the world economy revives, they can give high returns.
To safeguard one’s own interest in the future. The uncertainties come without any warning. Therefore, to protect oneself against it, investing is very important.
Diversification into the various asset classes is of prime importance when one is looking to invest. Say, if someone is looking to invest via mutual funds, they can do so by allocating the portfolio in different funds like equity fund, debt fund, index fund, hybrid funds, gold fund, etc.
Various Investment Avenues in India:
There are various forms of investment avenues that are available in India. The investment can be in the form of stocks, mutual funds, deposits, Provident funds, Pension schemes, etc. We will be discussing here the most frequently invested upon.
Stocks: Stocks are basically the ownership of the company of which the stocks have been bought. These are ideal forms of long term investment if someone has a little risk appetite. This form of investment has the best return making possibility for money invested.
Mutual funds: These forms of investments are ideal for people who are not willing to manage their investment on their own. They rather put their money in a fund (pool of investment) and which in turn is managed by the fund manager. There are various forms of funds like the equity-linked fund, debt fund, hybrid fund, gold fund, etc. Depending on one’s risk profile, one can choose the kind of fund.
Fixed Deposits: Probably, the safe heaven when it comes to investing. Through Fixed deposits, one can a fixed amount of interest for a pre-decided tenure. The interest on fixed deposit keeps changing depending on the economic conditions and on banks’ discretion.
Recurring Deposits: Very similar to Fixed deposits except for the fact that there is a periodical investment (every month) for a pre-decided tenure. These forms of investment are best suited for smaller goals within a foreseeable future.
EPF (Employee Provident Fund): This is the favorite amongst the salaried class. This form of investment is exempted under section 80C. This is a fixed portion that is deducted from the salary on monthly basis and the same amount is matched by the employer as well. EPF is completely tax-free and the interest rates are decided by the government.
PPF (Public Provident fund): This investment instrument is a long term investment by nature. The usual duration is for 15 years. Investments in PPF can be used for tax exemption. PPF can be used as collateral if one wants to take a loan against them.
In this article, we discussed why it is so important to invest, especially amid the COVID19 pandemic. Here are a few of the key takeaways you from this post:
Investing is the most reliable way of securing one’s future and meeting one’s long term goals.
One should not confuse investing with trading, as investing is for the long term and trading is for the short term.
The purpose of Investing is to earn stable and long term gains. While the purpose of trading is to make quick and short term profits.
With the help of investing, one can plan their future goals and aspirations.
Lastly, the most important purpose of investing is to plan and secure one’s future.
That’s all for this post. I hope it was useful for you. If you’ve got any queries related to investing amid coronavirus times, feel free to comment below. I’ll be happy to help. Happy investing.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
After the gold prices crossed Rs. 50,000 for 10g after 9 years period since 2011 in India, there seems to be no stop to how high the prices can go. The gold prices touched Rs.58,100 for 10g in Bangalore as of 7th August. This shouldn’t have come as a surprise because commodities like gold have always had exceeding demand in India. Especially after considering that India is one of the world’s largest consumer second only to China.
However, the increase seems unrealistic in times of pandemic where every investment seems to have suffered, only gold seems to have found its biggest boom. In the three year period from September 2016 to October 2019, gold saw an increase of 25% in its value. But along with the increasing troubles of 2020 in the midst of a pandemic the value of gold has already shot up 37.8% or by Rs. 15,240 with 5 more months to go.
Today, we take a look at the scenario finding possible reasons for the boom and also discuss if investing now is a good idea.
The Indian Gold Market
It would be rare to find a market in India that has consistently been in demand such as that of Indian Gold. There have been many jokes that have passed on claiming that the gold available in households is more than sufficient to cover all the deficits and debt that our country faces. But when we look at the following figures these statements may not be exaggerated. Indian households have piled up as much as 25000 tonnes of gold. To put things in perspective that alone would amount to Rs. 145.25 lakh crores in today’s rates. India’s central bank the RBI, on the other hand, has a total holding of 653.01 tonnes of gold. That too after buying additional 40.45 tonnes of gold in the current year.
For many Indians, gold has always been the favorite investment instrument traditionally apart from the land. Despite this, a significant portion is still placed in liquid assets like cash, stocks, etc. In the times of a pandemic, individuals are seeking shelter for their savings in an investment that doesn’t necessarily provide great returns but at least maintains its value and provides liquidity. This has led to the demand for gold skyrocketing to new heights.
Now we take a look at some other factors that have lead to this increase in demand.
1. Scarcity
As you may already know that gold is scarce because all gold is mined. Over time however mining for more gold has become difficult and due to its characteristics, it is safe to say most of the gold is recycled and put back into circulation. But luckily enough this gold cannot be consumed like other commodities. Enabling it to keep its value since time immemorial keeping up with the rising population. Another factor that adds to its scarcity due to its lack of consumption is what happens after the commodity is bought.
Gold, after it is bought, is taken out of the market for long periods of time only to be kept in a drawer or bank locker taking it out of the market for years. But these factors like scarcity, inability to consume, etc, have always existed. Then why have the prices increased now?
These factors have always existed at lower prices only because the increasing demand has always been checked with adequate supply. In order to limit the spread of the virus most countries had to resort to a lockdown. This has had adverse effects on not only mining but also a lack of shipments. As per some estimates, the global demand for gold is 1000 tonnes more than the supply. This rise in demand as mentioned earlier has been due to people’s search for a secure asset.
2. Culture
The demand for gold also has its roots in humans’ desire for beauty. Demand for gold in India is interwoven with culture, tradition. This is primarily because of the dependence of marriages and other functions on gold. According to a study by the World Gold Council, Indian consumers view gold as both an investment and an adornment. When asked why they bought gold, almost 77 percent of respondents cited the safety of investment as a factor, while just over half cited adornment as a rationale behind their purchase of gold.
3. Geopolitical Factors.
People search for a safe haven like gold extends to periods of geopolitical tension like war. This is the reason why crisis situations like wars have a negative impact on almost all asset classes. But when it comes to gold it has a positive impact. This increase in the price of gold was earlier also noticed during the Korean nuclear crisis. Similar trends are noticed due to tensions between India-China and US-China.
4. Exchange Rates
It has been observed that a weakened US Dollar also leads to a rise in gold rates. The same is noticed in the current situation.
5. Limited Influence by Big Market Movers.
In stock markets, it is the FII and DII’s that are termed as market movers. This is because of their ability to influence market trends due to top huge capital in possession. In the Gold market, it is the central banks that have a significant influence. This is because almost every central bank keeps reserves in the form of investment in gold. When an economy is performing well and the RBI has sufficient foreign reserves it will want to get rid of gold.
Because gold does not generate any return and a booming market will provide a better return if the money is invested elsewhere. But in this scenario, the other investors as well will not want to invest in gold as they too would prefer to earn returns. Hence central banks are caught on the wrong side of the trade leading to a fall in the value of gold.
But however, the influence the central banks like RBI have is limited. This is because of the Washington Agreement. This agreement, however, is not binding and is more like a gentleman’s agreement. According to it, central banks will not sell more than 400 metric tons a year. Limiting the influence of central banks even if they want to benefit from high prices.
In Closing: Should you Invest in Gold now?
Predicting Investments is always tricky due to the uncertainties present. Most of us may have already noted the effects of economic turmoil on gold and decided to invest in the future if we are faced with a similar scenario. But that doesn’t help today, does it? In order to help you take better decisions, let us take a look at previous gold rate highs.
If you notice in the above chart you’ll be able to see that the Gold rates boomed in the 1980s as well. But a person investing in such a high would only reap the benefits almost 3 decades later post 2008. Similarly, a person who invested in 2011 is reaping some minimal positive benefits in 2020. Hence considering this if investments were made in gold say in early 2020 is a completely different story than investing now.
However, it is also best to take a look at the forecasts predicted by analysts. Analysts, however, have been bullish and have predicted that gold prices could go up to Rs. 65,000 for 10g in the next 18-24 months. But it is necessary to note that these estimates depend on a period that COVID-19 will take a while more to be controlled. Also, public vaccine availability is not anticipated for at least months to come.
From the above arguments, it shows that when the investment is made on a long term perspective there may be other alternatives that provide better results in the same time frame. However, investing for short periods completely depends on one’s estimates for COVID control or vaccine availability oy unavailability.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
Understanding Futures Contract and their importance: The Futures and Forward Contracts are a financial instrument that derives their value from the value of the underlying asset. Basically, the futures contract are contracts between buyers and sellers, where the buyer agrees to buy a fixed number of shares from the sellers, at a specified time in the future and at a pre-determined price. The futures contract derive their value directly from the value of the underlying asset. Moreover, they are one of the highest traded derivative instruments in the world.
In this article, we are going to discuss futures contract in detail including the importance of these contracts and how to trade in futures contract in India. Let’s get started.
Difference between Futures contract and Forward contract
There are two major points of difference between Futures and Forward contract. Firstly, futures are a legally binding contract to buy or sell the underlying asset or a specific date. Secondly, the futures contract are done via Futures exchange i.e., they are regulated.
A standardized contract specifies the time, quantity, value, quality, time, and location of the underlying asset. The product can be a commodity, currency, stocks, index, etc. The standardization of contract sets the same rules, specification of contract for all the participants. And because of the standardization, the ownership of the contract can be passed to any other trade by way of a trade.
As the Futures contracts are exchange-traded, it guarantees the parties involved that the contract will be honored. All the futures contracts are centrally cleared via exchanges thus eliminating the counterpart risk.
How are Futures contract traded in India?
In India, the futures contract are mainly traded in two forms – Stock Futures and the Index Futures.
— Index Futures
The index is the grouping of stocks. It simply measures the change in the prices of group stocks over time. Say, for instance, Bank Nifty represents the top 12 banks in the Indian Banking system. These banks are from both the public and private sectors. And any movement in the share price of these banks directly impacts the index. Future contracts are also available for these indexes. They directly derive their value from the value of the index. The following are some of the characteristics or traits of these indexes:
Size of the contract: Each and every contract in the futures contract have a specified fixed size. Anyone willing to trade will have to buy the full contract or multiples of it. Say, for instance, if I am trading Nifty 50 Index, then each lot has 75 shares in it. And in the Bank Nifty, each future lot has 25 shares in it. These are the two most actively traded Index futures in the Indian equity market.
Expiry: Each and every index futures have a specified date of expiry. All the Index futures are settled on the last trading Thursday of the month. If the last Thursday is a holiday, then the expiry happens on the previous working day. Since the index are the culmination of various stocks, hence there is no physical delivery of the shares on the index. Only the cash differential is to be paid.
Time frame: The Index futures have three contracts running simultaneously all the time i.e., the near month (1-month), the middle month (2-month), and the far month (3-month). As and when the near month contract expires, a new far month contract is added to the series.
Margin Required: The margin required to trade the futures contract is comparatively high, as the position are exposed to market to market (M2M) risk and the brokers and exchanges will have to safeguard their interest in case the index becomes very volatile on a particular day.
— Stock Futures
The basic premise of trading stock futures is very similar to Index futures. Stock futures are the derivative instruments, that derives their value from the value of the underlying security/stock. The contracts have a specific size, fixed price, and specified date. Once the contract is entered, it will have to be honored. Following are some of the characteristics of Stock futures:
The size of the contract: All the stocks trading in the futures market, have a different number of shares in each lot. We can’t trade just one share to trade futures. A minimum of one lot has to be traded. For example, one lot of futures contract of Reliance industries has 505 shares, one lot of Maruti has 100 shares, one lot of ICICI bank has 1375 shares etc.
Expiry: All the stock futures contract have a fixed maturity. They expire on the last trading Thursday of the month. And if the last Thursday is a holiday, then they expire on the previous trading day. The stocks have three expiring contracts – near month (1-month), middle month (2-month), and far month (3-month).
Margin: The margin required to trade stock futures contract is very high to cover for Mark to Market (M2M) losses. This is basically done to protect the interest brokers and the exchange.
How Are Futures contract Priced?
Futures contract derive their value from the value of the underlying assets. There is always a variation/difference in the prices of the cash segment and derivatives segment. There are basically two methods of pricing the futures contract: The Cost of Carry Method & The Expectancy Method.
— The Cost Of Carry Model
Under this method, the market is assumed to be perfectly efficient. There is no difference in the value of cash market and futures contract. So, the profit made by trading the cash segment or futures segment is same, as the movement in the prices are aligned. Following is the process of calculating the prices under the Cost of Carry model
Futures Price = Cash Price + Cost of Carry
The cost of carry here refers to the cost of holding the futures contract till maturity.
— The Expectancy Method
Under this method, the futures prices are the expected cash price of the underlying asset in the Future. So, if the market is positive/conducive for the underlying asset, then the futures price will be higher than the cash price. And if the market has a weak sentiment towards the underlying asset, then the futures price will be lower than the underlying asset.
Advantages of Trading Futures contract
Here are a few of the major advantages while trading in the futures contract:
Futures contract are one of the safest mode to hedge one’s exiting position in the market i.e., if I am long in shares of a particular company, I can hedge my position by taking short in futures contract of the same underlying Asset
The futures contract are high leverage instruments i.e., to trade futures contract we have to pay only a fraction of the total value. In general, the margin amount is just 10% if total value. This margin money acts as a collateral, in case the value of the underlying asset goes opposite to the views of the investor and he incurs losses. Say, if one futures lot of XYZ company has 1000 shares. And if the price of one share is Rs.100. So, if one were to buy 1000 shares, then the total value to be invested will be Rs. 100000 (1000*100). But, to trade futures contract, one has to keep only Rs. 10000 (10% of total value) as margin.
Because the futures contract are regulated by exchange, liquidity is never a factor while trading futures contract. One can exit their position anytime from the market.
Because of the low margin requirement, small players and speculators get to be a part of bigger game
Short selling becomes very easy while trading Futures contract. And one can legally short position in the shares of the company, by shorting futures contract.
The buying or selling pressure in on particular underlying asset can help us to gauge the future demand and supply of the shares
Key Takeaways
In this article, we tried to cover what are futures contract, how they differ from forward contracts, how are futures contract traded in India, and the advantages of trading futures contracts. Here are a few of the key points to remember from this post.
Futures contract derive their value from the value of the underlying assets.
Because of the low margin requirement, the futures trading is very popular amongst traders
The futures contract are exchange regulated, there is never the question of trust amongst the traders
One can exit their existing futures contract position anytime from the market by taking an opposite position in the futures market.
It is also a very popular hedging instrument for already existing long position in the cash market
The Index futures are cash-settled
There are two methods of calculating the futures contract value – The cost of carry method or the Expectancy method
That’s all for this post. I hope this article on what are futures contract is useful to you. If you’ve got any queries related to this concept, feel free to ask below in the comment section. I’ll be happy to help. Happy trading and investing.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
An overview of the National Educational Policy (NEP) 2020: On July 29th, 2020 the Modi government announced the New Education Policy in a move that left us stunned over the sweeping changes involved. The only dismay that most of us had was that our wish to be able to study once these reforms are imposed is not possible.
In this article, we cover the key points of the NEP and their views from different perspectives with hopes that the policy is better understood and loopholes if any are addressed.
Highlights of the New Education Policy
This is the third education policy bought forward by the Indian government in its efforts to raise Indian education standards. A much-needed decision. 34 years after the last policy was implemented it is also the first Education policy by the BJP. The policy was approved by the union cabinet but is yet to be presented in the parliament.
The new National Educational Policy also requires further regulation between the state and center. However, it is still policy and not the law to be followed. The following are some of the points in the policy.
— NEP for Schools Students
1. New pedagogical and curricular structure of school education (5+3+3+4):
The education system currently follows the 10+2 structure. This will soon be replaced by the 5+3+3+4 curricular structure. The new structure can be better understood when it corresponds with a child’s age i.e. 3-8, 8-11, 11-14, and 14-18 years respectively. The first stage includes time spent in Anganwadi and preschools.
This new structure divides the existing structure as per the cognitive developmental stages of a child. These are early childhood, school years, and secondary stage. It also should be noted that this change in structure does not change the years that a child spends in formal education. They remain the same as before.
The new structure brings changes to the examination structure too. As per existing norms, a child gives an exam after every academic year. But once the NEP is implemented children will give examinations only in class 3,5, and 8. This is apart from boards which too will see considerable changes.
2. Earlier, schooling was mandatory for children aged between six and 14 years. Now education will be compulsory for children aged between the three and 18 years.
This move would allow those aged from 14-18 years to also demand the same Right to Education(RTE) that was earlier present only up till 14years. Now children above the age of 14 too can demand this. Meaning they can get educated up to 12th grade free of charges at any government educational establishment.
3. Mother tongue as the medium of instruction
It is obvious that the mother tongue is the first language that a child understands. Hence understanding newer concepts will be much easier when if done in the mother tongue itself. In order to implement this the medium of instruction in schools will change too.
This move is also inspired after observation of the medium of instruction imposed in some European countries. In these places, when a child is introduced into the schooling system he is only taught in his mother tongue be it German, Italian, Spanish, Russian, etc. depending on the country. Due to this, children are able to grasp trivial concepts easily. This will be made compulsory until 5th grade at least or preferably until the 8th.
The NEP also includes the three-language policy. Here all students will learn three languages in their school. It is mandatory that at least two of the three languages should be native to India.
The introduction of this policy is also in line with the NEP’s aim of increasing the Gross Enrollment Ratio in higher education. It has been found that the inability to cope with languages like English as the cause for dropping out.
4. Baglessdays and informal internship
According to this, students will participate in a 10-day bagless period. During this period students from Grades 6-8 will intern with local vocational experts such as carpenters, gardeners, potters, artists, etc.
This was another move, that was hugely appreciated as necessary professionals that are looked down upon by society will finally be viewed with newer outlooks in the coming generations. This move will also enable children to pick up at least one skill during the period.
5. Coding for Children
Children will now be able to learn to code from class 6 as coding will be included as a part of their curriculum. This move will put students at par with the Chinese where similar policies with regards to coding have already been implemented in their education system.
6. Multi-Stream Flexibility
Once the NEP is imposed, the compartmentalization of students post 10th into Arts, Science and Commerce will be blurred. Now students will be allowed to take up courses from varied streams depending on their interests.
For eg., A student interested in physics will be able to do so by also taking up subjects like economics and politics. This was one of the most lauded moves of the NEP. Furthermore, Bachelor’s programs too will be multidisciplinary in nature with no rigid separation between arts and sciences.
— NEP For College Students
7. Common Entrance Tests for Colleges
Students now will be judged by common SAT (present in the US) like tests that will decide the eligibility of students for different colleges. These tests will be held twice in a year.
8. 4-year bachelor degree
Funnily enough, just a few years back this move was highly criticized when implemented in Delhi. This move does not simply make bachelor degrees longer but also provides students with the option to change degrees if they feel it does not suit them. A student who realizes this and will be allowed to drop.
He also is allowed to transfer the credits he earned in the previous degree into the degree he chooses. A student who decides to drop out after completing 2 years can do so and will be provided with a diploma certificate associated with that degree. Students who drop out after 3 years will receive a bachelors missing out only on research opportunities present in the final year.
9. Fee Cap
The New policy suggests a cap on the fee charged by private institutions in the higher education space. One of the major hindrances a student faces when trying to obtain quality higher education has been affordability. A fee cap imposed would go a long way in making education more equitable.
10. Opening up higher education to foreign players
According to this the top 100 education institutions in the world will now be encouraged to come to India and set up campuses. Every year 750,000 Indian students go abroad in pursuit of higher education. This move will not only go a long way in reducing brain drain but also help in making global education more accessible. A similar move was implemented in the UAE successfully. The UAE is now home to universities like Hult International Business School, University of Wollongong, British University, American University of Sharjah and Dubai. Now that UAE can implement such a move it also shows the way to countries like India. Especially because we hold a student population much greater. Increasing the interest from foreign universities.
Differed Views over the NEP
Every point mentioned above is an advantage in itself. But post the disclosure of the NEP there have been varied viewpoints, concerns, and criticisms surfacing. We now look at these so-called loopholes in the NEP so that they can be further addressed
1. Language
There are many viewpoints directly addressed at languages i.e. medium through which students will be taught in schools, and the options available to them. First comes the problem of even introducing mother tongues into schools. India already faces a huge shortage of teachers leading to the skyrocketing teacher: student ratio in the country.
On top of this finding, a staff that is Qualified to teach is a challenge in itself. Next comes the challenge of bringing forward material in each of the mother tongues. Say for eg. bringing forward textbooks of maths, social in each of our mother tongues is a herculean task in itself.
It is completely understandable that the government wants to hold the same status as Germany, China, etc. where foreigners have to learn the language in order to better deal with the country. At the same time when the NEP is marketed in that way, it does not address that there are 22 languages active in India instead of one national language as in other countries.
The other problems that have already been raised with respect to language associates with the three-language policy. States like Tamil Nadu have already begun calling out the center and have associated the NEP as a tactic simply to implement Hindi in the state.
The three-language formula in the new National Education Policy (NEP) 2020 is “painful and saddening”, said Tamil Nadu Chief Minister Edappadi K Palaniswami, as he vowed not to implement the new policy. Unfortunately, the imposition of Hindi has been a major issue in Tamil Nadu often leading to protest and has reduced the NEP to another gimmick by the center by the current CM.
2. The increasing disparity between sections of society
The policy shows how students in government schools will be taught in the regional languages up to 5th standard if not 8th. The private schools, however, will not take a step back in introducing English from the early stages. If a student only begins to learn English 7 years later to that of students in private schools the difference will only add to those of learning a language in an environment that is not conducive to speaking, writing, and reading English.
Even when it comes to providing material to students in regional languages or mother tongues the NEP 2020 mentions that textbooks should be available in regional languages, but also must be downloadable and printable. It fails to address that less than 30% of Indians have smartphones. And if you and the people around you do have one it just shows us the fortunate category we are in and the fortunate category of people we surround ourselves with at all times. Also, there is a need for computers in order to learn to code.
3. Four-year graduation program
The four-year graduation program, unfortunately, lets go of most of the benefits after approving dropouts in the first year in order to change streams. What is the purpose of allowing dropouts in the later stages? Why should a student even wait to complete 4 years if he receives a diploma in two? If he leaves immediately he may have added 2 years of work experience instead of classwork.
And on top of all, how will a child from a lower-income background answer these questions when he is asked to take his diploma and start contributing to the family income.
Closing Thoughts
Although there may be a few minor loopholes the new National Educational Policy, nevertheless is revolutionary. Hopefully, these are further addressed in the parliament sessions to come. The next question that pops up is – By when will the policy be implemented? The implementation, however, will start immediately with the first change being the Ministry of Human Resource Development getting renamed as the Ministry of Education.
Other implementations are to be done in phases from next month. Meaning many significant changes of the over 100 action points being noticed. The complete policy, however, is meant to transform the education system by 2040. Final judgment on the extent of its success can only be made on its execution. Hopefully, it doesn’t take till 2040.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
Understanding what are Forward Contracts along with its risks and outcomes: One of the most important key concepts to understand for a derivate trader is forward contracts. Through this article, we aim to give a clear understanding of the Forward Market and Forward contract.
Today, we’ll cover what are forward contracts. We’ll also look into why do both the parties enter into the contract, possible outcomes, how they are settled, risks associated, and more. Let’s get started.
What are Forward Contracts?
The Forward contract, as the name suggests, is a financial derivative transaction that is settled at a specified date in the ‘future’. The forward contract derives its value from the value of the underlying asset. Therefore, in that regard, the futures and forward contracts have a lot of similarities.
The forward contract can be said to be the more ancient version of the futures contract. The basic framework of the futures contract is very similar to a forward contract. The forward contracts are still used, however, the scale and volume are very limited.
— Understanding Forward Contracts with an Example
Let us understand this concept further with the help of a simple example. Suppose, there are two parties involved. One is the manufacturer and designer of Silver jewelry. Let us call the manufacturer as “ABC Jewelers”. The other party involved is the importer of silver and he sells in bulk to jewelry shops. Let us call him “XYZ Dealer”.
Say, on 5th Aug 2020, the current price of 1 kg of silver is Rs. 65,000. ABC enters into an agreement to buy 50 kg of silver two months down the line. The agreed-upon price is the price of silver on 5th Aug 2020. Therefore, ABC has to pay Rs. 32,50,000 (65000*50) to XYX to buy 50 kg of silver on 5th Oct 2020.
In short, after two months, both the parties in the contract will have to honor their agreement irrespective of the price of silver at that time.
— Why both parties enter into the contract?
From the above context, the buyer of the silver (ABC) is of the view that the price will go up in the future and wants to lock in the prices to benefit from the increased price in the future. On the other hand, the seller of the silver (XYZ) is of the view that the price is most likely going to decline in the future and wants to benefit from the locked-in current price.
Both the parties involved in this transaction have opposing views and hence they enter into a forward contract to express their views.
— The possible outcomes of the Forward contract
Scenario 1: Either the silver price goes up
If the price of the silver goes up in the future, then ABC Jewelers stands to make a profit, and XYZ dealer is dealt loses. Say, if the price of silver goes up to Rs. 70,000 per kg after two months. So, the profit of ABC in this case will be = (70000-65000)*50 = Rs. 2,50,000. And the same is the loss for XYZ dealers.
Scenario 2: Either the silver price goes down
If the price of silver falls in the future, the XYZ dealers stand to make a profit, and ABC jewelers stand to make losses. For example, if the price of silver after 2 months falls down to Rs. 61,000 after two months. Here, the profit for XYZ dealers, in that case, will be = (65000-61000)*50 = Rs. 2,00,000. And, this will be the loss for ABC jewelers.
Scenario 3: If the price of silver remains unchanged
In that case, neither of the party (ABC or XYZ) will stand to lose or make any money from this contract.
How are forward contracts settled?
Forward contracts are settled via two ways, either cash-settled or the underlying asset is physically delivered.
1) Physical Settlement: Here, ABC jewelers pay XYZ dealers, the full agreed-upon amount (Rs. 32,50,000) of buying 50 kg of silver and in return gets the physical delivery of silver.
2) Cash Settlement: In this case, there is no actual physical delivery of silver. Just the cash differential has to be paid. Say, if the price of silver goes up, then XYZ dealers will have to give the cash differential to ABC jewelers. And if the price of silver goes down then XYZ dealers receive cash differential from ABC jewelers.
Assume, if the price of silver goes up to Rs. 67500 per kg. Then, XYZ dealer pays Rs. 1,25,000 ((67500-65000)*50) to ABC Jewelers for cash settlement.
Risks Associated while Trading Forward Contracts
Following are some of the risks associated with trading Forward contracts
Liquidity Risk: Theoretically, the parties with opposing views enter into a forward transaction. But, in reality, it is difficult to find two parties having an opposing view and willing to enter into the forward transaction. Therefore, the parties involved will have to approach the investment bank and who in turn scouts for willful parties willing to enter the forward contract.
Cost: The cost is a big factor in the forward contract. As the investment banks are involved in finding parties to enter into a forward contract, they come at a cost i.e., fee. Therefore, even if the price goes in favor of one of the parties, they make real profit only after the cost (fee to investment bank) is recovered.
Default Risk: The default risk is very much if losing party upon the expiry does not pay up the other party i.e., it defaults.
Regulation Risk: There is no regulatory framework while dealing with a forward contract. They are entered into with the mutual consent of the willing parties. Therefore, there is a situation of lawlessness and which is where the chances of default also increase.
Non Exit able before expiry: Say, halfway through the contact, if the view of one of the party reverses, then there is no way to exit the contract before expiry. There is no clause of foreclosure. The only option which they have is to enter into another agreement which again is a tedious and cost consuming process.
In this article, we tried to cover what are future contracts and how future market actually works in terms of transactions and settlement. Let us quickly conclude what we discussed here:
The basic premise while trading both forward and futures contracts are the same.
The forward contracts are contracts that are settled at a future date.
They are not traded via an exchange. The forward contracts are Over the counter – OTC derivative.
The forward contracts are non exit-able before the expiry.
These contracts can be either physically delivered or it can be cash-settled.
That’s all for this post. I hope it was useful to you. If you still have any queries related to future contracts, feel free to comment below. I’ll be happy to help. Happy trading and investing.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
Understanding what are Fibonacci Retracements and how to use it while trading: The concept of Fibonacci was introduced by Italian Mathematician called Fibonacci (also known as Leonardo Bonacci or Leonardo of Pisa). This concept was primarily introduced to solve the problem of understanding the population growth of Rabbits. And it has now become one of the most interesting and sought after concepts in Mathematics and Trading.
In this article, we’ll cover what is a Fibonacci Series, the implication of Fibonacci on trading, and how exactly to use Fibonacci while Trading. Let’s get started.
What is Fibonacci Series?
The Fibonacci is a series of numbers starting from zero and arranged in such a way that the next number is a summation of the previous two numbers.
Therefore, the Fibonacci series is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377………
Here are the calculation involved while finding the numbers in the Fibonacci series:
0 + 1 = 1
1 + 1 = 2
1 + 2 = 3
3 + 5 = 8
5 + 8 = 13
8 + 13 = 21
13 + 21 = 34 and so on.
A Few Fun Facts about Fibonacci series
Before moving forward, here are a few fun facts about Fibonacci series that you should know:
If we divide any number by the previous number, then the ratio is always equal to 1.618 (233/144 or 144/89 or 89/55 or 55/34, etc.)
Second, if we divide the number by the next number, then the ratio is always equal to 0.618 (21/34 or 34/55 or 55/89 etc.)
Needless to that the number 0.618 (or 61.8%) holds a lot of significance while calculating Fibonacci.
If we divid any number in the series by a number which is two places higher, then the ratio is always equal to 0.382 (21/55 or 34/89 or 55/ 144, etc.)
And if we divide any number in the series by a number which is three places higher, then the ratio is always equal to 0.236 (21/89 or 34/144 or 55/233, etc.)
From the above facts, we get the percentage series for Fibonacci to be 61.8%, 38.2%, 23.6%
The implication of Fibonacci on trading
The Fibonacci series of 61.8%, 38.25, and 23.6% have a very impactful presence in all the charts of the share price of any company. It is applied regularly when we see movement in the prices of the shares. And it can be applied in all the time frames.
It is a known fact that the share price of the company does not move in one direction. The prices always have a zig-zag pattern. If the share price of the company has gone up from 100 to 150, then before having another leg up, it is most likely to retrace back. But to find the level of retracement, Fibonacci retracement levels come in very handy.
For example, if the share price of the company before going up = Rs. 100. In, the first leg of the move, the share price goes up to = Rs. 150
Therefore, if the share price retraces to 38.2% then it will fall to = 150 – 38% of 50 = 131. And if the share price retraces to 61%, then it will fall to = 150 – 61 % of 50 = 119 (approx.)
If we look at the above figure above, Maruti looks strong in the move up from Rs. 4000 to Rs. 5500. And looks poised to go up more. But before going up, the market makes a correction and it’s till the projection range of 38.2% to 61.2%. And after consolidating in that range, it makes a fresh move up and makes new recent high.
Therefore, if someone is looking for a correction in the market, Fibonacci retracements are a very useful tool and it also helps in entering the market if someone had missed the first move in the market.
In fig 2, If we look at the figure above, the share price of BajajFinsv is on a downward trend. And looks poised to fall more.
However, before falling, the market has made a small correction rally and is consolidating around a 38% retracement level. And now we see, that the share price is making lower highs and lower lows. Therefore, we could see the bearish momentum coming back and market breaking or re-testing previous lows.
Uses of Fibonacci while Trading
Assume, if we are looking to buy the stocks of a particular company but because of the strong momentum in the price, the share price has gone up substantially and it is very expensive to buy the shares at the current price. Here, we wait for a correction in the share price of the company and wait for it to retrace around 61.8%, 38.2%, or 23.6% levels.
Anyways, before picking the right retracement levels, the following factors also need to be considered: The candlesticks formation near the retracement levels, The price action around the level, The support and resistances around it, The volume at these retracement levels, And the overall fundamental picture.
Conclusion
In this article, we tried to explain what are Fibonacci Retracements and how to use it while trading. Here are a few conclusions from this post to take away:
The Fibonacci should be used when one is looking to plot the retracement or projection levels.
Then Fibonacci is useful when one has missed the entry at first instance but is still interested in buying the shares of a particular company.
The important levels of Fibonacci are 61.8%, 38.2%, and 23.6%
Just the Retracement levels of Fibonacci should not be the only basis of entering the trade. Overall, fundamental and technical factors should also be considered.
That’s all for this article. I hope it was helpful to you. If you have any doubts related to Fibonacci Retracements, feel free to comment below. I’ll be happy to help. Happy trading.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
Understand the Oil and Petroleum Industry in India and its major players:The Oil and Petroleum Industry in India has been among the eight core industries that contribute largely to the GDP of India. India is the 3rd largest Oil Consumer in the world after USA and China. It already attained 63% of the energy self-sufficiency by 2017 due to its increased attention to the promotion of alternative sources of energy namely, wind, solar and nuclear energy.
The stock market for Oil and Petroleum products also has started showing surge due to the announcement of the Government’s privatization program resulting in more global energy players showing interest in buying a majority stake in the Bharat Petroleum Corporation.
This article aims to provide the latest trends in the Oil and Petroleum Industry in India including its market size. Later, we will talk about the big players in this industry in India. Let’s get started.
India’s Economic Growth via Oil and Petroleum Industry
It is important to note that India’s economic growth is largely related to its demand for energy. The projections reveal that the need for the energy sector in oil and gas is expected to grow and therefore, investors consider investment opportunities in this sector in India.
Additionally, the Government of India has also adopted certain policies to cater to the industry with maximum investments. Hence, it has allowed 100% Foreign Direct Investment (FDI) in this sector including petroleum, natural gas, and refineries. This is evidential from the latest developments in Reliance Industries Limited, Cairn India, and Bharat Petroleum Corporation. As the fastest-growing sector, investors see promising returns in this sector.
Market Size of Oil and Petroleum Industry in India
Now, let us talk about the numbers to understand the market size of the oil and petroleum industry in India better:
India gained the position of the second highest refiner in Asia as its Oil Refining Capacity was calculated to be 249.9 million metric tons (MMT) in May 2020 of which the private companies contribute about 35.36% for the year 2020.
India is expected to be one of the major contributors world-wide to non-OECD petroleum consumption.
In the year 2020, crude oil production is recorded at 30.5 MMT and natural gas consumption is expected to reach to 143.08 million MMT by 2040.
Similarly, in 2020, the import of crude oil increased to 4.54 million barrels per day (mbpd) as compared to the last year and LNG import is 33.68 billion cubic meters (bcm).
The consumption of petroleum products has also seen a spurt of 4.5% at 213.69 MMT.
The export of petroleum products from the country also has risen to USD 35.8 billion as compared to USD 34.9 billion in 2019 and the quantity-wise rise is at 65.7 MMT in 2020 as compared to 60.54 MMT in 2019.
Currently, India as one the largest emitter of greenhouse gases has the share of natural gas in the energy sector of 6.2% which is expected to rise to 15% by 2030.
As the second-largest consumer of Biogas India is planning to open 5000 CBG plants by 2023 under the SATAT scheme.
Minister of Petroleum and Natural Gas, Government of India sets the target to reduce oil and gas import dependency by 10% by 2022 thereby giving a wide range of opportunities to foreign investors to invest in projects worth US$ 300 billion.
Gas Authority of India Limited (GAIL) as of March 2020 had the biggest share of 71.61% of the country’s natural gas pipeline network.
Indian Oil Corporation Limited in March 2020 was leading the segment of the product pipeline network with 51.25%.
The energy trade between India and the USA is going to cross US$ 10 billion by the end of the year 2020.
Investment and Government Initiatives
According to the senior-most market technical expert, CK Narayan, the crude oil prices will continue to grow as he analyzed after the biggest downfall during the recent pandemic, it has risen to $44 and will continue to rally further. Mr. MK Surana, the CMD of Hindustan Petroleum also predicts the surge in the price of crude oil in the last quarter of the year 2020 over $45. He also finds the Indian refinery sector as promising due to their ability to get established at the world-class level.
It is indeed worth to mention here that the petroleum and natural gas sectors were able to grab US$ 7.82 billion during the 10 years April 2000 to March 2020, according to the Department for Promotion of Industry and Internal Trade Policy (DPIIT). The initiative from the Government to set up bio-CNG plants has allowed them to spare US$ 1.1 billion to promote clean fuel.
Natural Gas production also is going to be increased to 15% by 2030 and the top players of the Liquified Natural Gas producers aim to have 1,000 LNG stations across the country which is something that will attract more investors. According to Rajeev Mathur, an executive director of GAIL (India) Ltd, the natural gas demand will be increased by 3-4% by end of March 2021. ONGC has raised US$ 300 billion through the External Commercial Borrowing.
The government is planning to invest US$ 9.97 billion to expand the gas pipeline network. The Government also approved fiscal incentives to improve recovery from oil fields with an intention to lead the hydrocarbon production to Rs. 50 lakh crores in the next 20 years.
Top Players in Oil and Petroleum Industry in India
— 1) Reliance Industries Limited
As the world’s largest refining hub, RIL’s Jamnagar, Gujarat’s plant has a refining capacity of 1.24 mbpd. Until June 2020, its segment revenue from oil and gas was US$ 455.53 million.
Its Petroleum segment has a vast network of over 1300 fuel retail outlets across the country. It becomes the first company to have the market capitalization of over Rs. 13.75 lakh crores in India.
— 2) Oil and Natural Gas Corporation (ONGC)
ONGC, as the largest crude oil and natural gas company of the country, signed a Memorandum of Understanding (MoU) with NTPC to set up a Joint Venture for the renewable energy business in India. Its market cap is more than Rs. 1.04 lakh crore.
ONGC Videsh – subsidiary of ONGC, which is India’s biggest International Oil and Gas Company, has made new oil discoveries in Colombia and Brazil as part of its Energy strategy 2040. The company also signed an MoU with ExxonMobil for offshore blocks.
— 3) Petronet LNG Limited
This company has set up the country’s first LNG receiving and regasification terminals and has a market cap of Rs. 38,227.5 crore. The company is expecting partnerships with fuel and gas retailers on LNG stations for long haul trucks and buses. With the aim to set up 300 LNG stations by 2023, it is planning to set up 1,000 LNG stations over a period of time across the country.
— 4) Indian Oil Corporation Limited (IOCL)
IOCL focuses on the safety of India’s energy sector and self-sufficiency in refining & marketing of petroleum products with over 47,800 customer touchpoints. It has a market capitalization of Rs. 1.71 crore and contributes the highest to the national exchequer by way of duties and taxes.
In March 2020, it started supply of the world’s cleanest petrol and diesel across the country and it is also planning to invest Rs. 500 crores in Karnataka.
— 5) Oil India Limited
A public sector company and the second-largest in hydrocarbon exploration and production, Oil India Limited shares are showing increasing trends. Despite blowouts at one of its sites, there are predictions from the market experts that they will be able to recover and prices will be better gradually. It has a market cap of Rs. 10,291.01 crore.
Succinctly, the energy sector in an Indian economy is growing faster than any other major economies. The industry experts also predict the energy demand to double by 2035. Moreover, the country’s contribution to the global primary energy consumption is also estimated by the analysts to double by 2035.
The growth in the consumption of crude oil is projected to grow at 3.6% Compound Annual Growth Rate – CAGR and the natural gas to grow at 4.31% CAGR by 2040. The Diesel demand too will be twice by 2029-30.
Therefore, the oil and petroleum sector look promising for the country and the coming years are going to be remarkable in terms of demand, consumption as well as the growth point of view.
An Analysis of Passenger Vehicles Industry in India to understand the latest trends and the key players: Indian economy holds the fifth-largest position in the auto market in 2019 and was expected to cross Germany by 2020 in terms of a number of sales. However, the recent pandemic has flipped the side to a completely opposite direction thereby causing a drop of over 17% in the industry.
Several Government initiatives and promising actions by the major automobile players of India was helping this industry to outperform at the world-class level by making the country a leader in this industry. The domestic Indian market is predominantly ruled by two-wheelers and passenger vehicles. The growing middle-class and young population has made the two-wheelers market the dominant one in terms of volume.
This article aims to study the Passenger Vehicles Industry in India including its current trends, biggest players, recent developments, and Government initiatives.
The Passenger Vehicles Industry in India
Passenger Vehicle (PV) is a motor vehicle which has at least four wheels where no more than eight seats are allowed in addition to the driver’s seat for transporting the passengers. Generally, cars are considered as passenger vehicles.
In India, the small and mid-sized cars selling is holding the highest position in terms of sales of the passenger vehicles (PV) industry. The PV industry recorded a market share of 12.9% in India until June 2020. Out of the total automobile exports of 4.77 million, PV accounted for 677,340 exports until June 2020. In 2019, over 3 million PVs were produced and sold domestically.
Currently, Maruti Suzuki and Hyundai are the top players in this industry. Maruti Suzuki with sales of over 208,000 Alto cars, 200,000 Dzire, and 192,000 swift cars reported in 2019 domestic sales of 1.75 million.
However, domestic sales in the PV industry recorded a decline of 9.1% until March 2020. Maruti Suzuki has already started selling BS-VI compliant vehicles that include Alto, Eeco, S-Presso, Celerio, WagonR, Swift, Baleno, Dzire, Ertiga, and XL6.
Latest Trends in the PV Industry in India
The entire automobile industry attracted Foreign Direct Investment of US$ 24.21 billion in the 10 years from April 2000 to March 2020. The growing demand has made the way for the industrialists to invest more in India’s ever-growing industry.
The announcement by Jaguar Land Rover in May 2019 of the launch of its locally assembled Range Rover Velar has made JLR cars quite affordable. The deal between the Tata AutoComp Systems (Tata Group’s Auto-component segment) and Prestolite Electric (based in Beijing) happened in January 2020 aims to enter the Electric Vehicles market by starting a joint venture of their own.
Force Motors’ investment of US$ 85.85 million focuses on the development of the two new models in the coming two years. MG Motor India is also planning to launch affordable Electric Vehicles in the next 3-4 years.
The Indian Government announced in the Budget of 2019-20 to provide tax deduction of Rs. 1.5 lakh for the interest paid on the loan taken to buy Electric Vehicles thereby promoting sales of such EVs. It is also planning to facilitate the start-ups involved in the EV space by setting up the incubation centers.
(FIG: PV Market Share Manufacture wise – FY19)
— FAME II (Faster Adoption & Manufacturing of Electric Vehicles Phase II)
It is also notable to mention here about the Government’s initiative that approved the FAME II scheme (Faster Adoption and Manufacturing of Electric Vehicles Phase II) w.e.f. April 2019 under which allocation of Rs. 10,000 crores were made to promote electric mobility in the country over the three years 2019-20 to 2021-2022.
The scheme aims to provide incentives on the purchase of such vehicles to promote electric and hybrid vehicles. They primarily aim to electrify the public transportation and shared transportation.
— Bharat Stage VI Norms
Introduced in 2000, these norms are the standards implemented by the Government to control air pollution by vehicles. The norms are based on various stages and as the stage goes up the rules become stricter.
Thus, BS-VI stage compliance would require more robust technologies and investment into such technologies to upgrade the vehicles. Consequently, the buyers will also need to pay more to buy the vehicles as the making cost goes up.
Market Leaders in the Indian PV Industry
As mentioned earlier, the PV market is predominantly led by Maruti Suzuki with more than 50% market share. The industry analysts believe this is due to their planning to empty the BS-IV inventories and keeping the BS-VI compliant vehicles available ahead of the time.
No matter what there are other players too who are contributing not as much as Maruti Suzuki, but their little contribution makes the Indian Automobile Market the fastest-growing market to be ready to compete at the global level. Let us see who these big players are, how are they contributing and what do they have in their baskets.
Here are the top seven passenger vehicle Makers in India:
Rank
Original Equipment Manufacturers (OEMs)
PV Sales FY20
PV Sales FY19
1
Maruti Suzuki
14,36,124
17,29,826
2
Hyundai Motor India
4,85,309
5,45,243
3
Mahindra & Mahindra
1,86,978
2,54,351
4
Tata Motors
1,31,197
2,31,512
5
Honda Cars India
1,26,899
1,83,787
6
Toyota
1,14,081
1,50,525
7
Ford India
66,415
92,937
— 1) Maruti Suzuki India Limited
The largest car maker of India, Maruti Suzuki is a subsidiary of Japan-based Suzuki Motor Corporation. They have already launched BS-VI compliant Tour S CNG & Tour S in this year. It has already crossed the 20 million sale milestone in the year 2019. It is leading the market by reaching the target of cumulative sales of one million utility vehicles. Until June 2020 it has recorded sales of more than 1.5 million units.
— 2) Hyundai Motor India Limited (HMIL)
The subsidiary of a South Korean parent company Hyundai Motor Corporation, HMIL is the second-largest carmaker in India. Its Santro car had been recorded as a runaway success. It was the first automotive company in India to achieve the export target of 1 million cars in just 10 years. This year, its Hyundai Venue car has been awarded as the Indian car of the year. It sold in 2019 545,243 cars however its market share declined in that year.
— 3) Mahindra & Mahindra Limited
The decades-old Indian multinational vehicle manufacturing company, Mahindra & Mahindra Limited. The largest tractors manufacturer in the world records the highest production in India of cars. With the introduction of SUVs in 2019, they reported a 2.21% growth in PV sales. In a challenging time, XUV300, Alturas G4 and Marazzo have helped M&M to add sales of about 27,000 units additionally.
— 4) Tata Motors Limited
The world’s leading automobiles manufacturer and an automobile arm of the Tata Group, Tata Motors has extended its presence globally by setting up Joint Ventures with Fiat and Marcopolo. It holds a 45.1% market share in the commercial vehicle segment in the year 2019. To improve electric mobility infrastructure in the country it has created a separate vertical by joining hands with Tata Power.
— 5) Honda Cars India Limited
As the leading premium car manufacturer of India, Honda Cars was established with the specific purpose to cater PV industry with the latest technology-based vehicles. It is a subsidiary company of Japan-based Honda Motor Co. Limited. It recently launched WR-V compact SUV with robust features in two different trim options and in both petrol and diesel fuel choices.
— 6) Toyota Kirloskar Motor Private Limited
It is a subsidiary of the Japanese parent company Toyota Motor Corporation. Among the carmakers, it holds the fourth largest position in India. In 2012, it started One Make Racing Series with the Etios car and witnessed an overwhelming response from the youngsters.
— 7) Ford India Private Limited (FIPL)
It is a subsidiary of Ford Motor Company and since 2019 Mahindra and FIPL joined hands to set up a Joint Venture. It is the number 1 Passenger Vehicle Exporter in India competing with Hyundai. It exports in 35 countries almost 40% of its engine production and 25% of its car production.
With the current situation of the global pandemic, the biggest challenge these car makers will face is the changing customer preferences. Due to the Work from Home concept, the demand of the Passenger Vehicles has seen a sharp fall in the six months so far as compared to the last year.
The industry experts estimate that the customers’ preference during this time has gone back to the original small and compact cars for which Maruti Suzuki is leading the market as always. However, for SUVs and MPVs the market may not be as good as for the small and affordable cars.
The luxury cars will too see a downfall. The predictions are also against the promotion of EV sales as they need advanced technology and are quite costly. Many startups are under a red zone meaning they are already falling short of cash and liquidity making it difficult for them to survive. Interestingly, the used car business will gain as the customers may face liquidity crunch to some extent.
A Brief Study on Public vs Private Banks in India: Regardless of which sector one works in, it relies on the banking sector. This is the very reason why the banking sector is known as the backbone of the economy. A country with a poor banking sector is not only destructive to the banking industry but also to economic growth overall.
Due to its importance today we try and understand the banking sector through its division of public and private banks and analyze their contributions to helping the economy grow or not in the recent past
What do you mean by Public and Private banks?
Banks are classified as Public or Private depending on their ownership. First, let us understand the basic difference between Public vs Private Banks in India:
— Public Sector Banks
A Public sector bank is one where the government owns a majority stake (i.e. more than 50%). In common parlance, they are also known as government banks. Due to its ownership, the aims set for these banks revolve around social welfare and fulfillment of the country’s economic needs. These banks are formed by passing Acts in the parliament. Eg. Bank of India, Canara Bank, Punjab National Bank, Bank Of Baroda, State Bank of India.
A Private sector bank is one where the majority stake is held by private organizations and individuals. Private banks have profit maximization set as their main goals. These banks are registered under the Companies Act.
Eg. HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank, Yes Bank.
Differences in the working of Public vs Private Banks in India
Although the banks being public or private perform the same functions, due to their aims and period of existence customers notice significant differences depending on the banks they choose.
Private banks arrived relatively late in the Indian banking sector thanks to the reforms introduced in 1991. This is one of the reasons why people find public banks secure as they already have been around longer enabling them the gain their trust. Also, the confidence that the government will not let a public bank fail adds to this security. Private banks make up for these security concerns through their technological advancements and superior customer service.
What is it like to work for these two bank types?
In the year 2013 80,000 government bank jobs received close to 40 lakh applications making it one of the most sought after careers. The reason for this has been the job security and reduced work pressure present in these banks. This, unfortunately, has reflected on the banking sector as public banks have been known to take too long to perform duties.
This can be attributed mainly to the fact that the employees do not have any incentives to work better. The competitiveness faced here is prior to the job in the examination set during the selection process.
Working for private banks, on the other hand, increases the rewards available to an individual but with additional risk. Employees receive higher remunerations but are required to work in highly competitive environments. This too has rubbed off on how the functioning of private banks is viewed i.e. fast-paced, efficient, and easier to deal with.
Longer periods of existence in the Indian markets have allowed public banks to develop a larger customer base in comparison to the private banks. The goals set have also played a major role in achieving this. Public banks function with the aims of ensuring banking accessibility throughout the country.
This has motivated the public banks to penetrate deeper into rural areas gaining a greater customer base. Private banks, on the other hand, enter only areas where they see a potential to earn a profit. This is the reason private banks mainly function in urban areas and not rural.
— Market Share
As of 2018 public sector banks account for 62% of the total banking assets and 58% of the total income, the rest occupied by private banks. Although public banks have a greater market share, their hold has been continuously slipping. As of 2016 public sector banks accounted for 75% of the total banking assets and 71% of the total income.
Public banks are steadily losing out even when it comes to loans. Figures from 2018-19 show that private banks gave a total of ₹7.3 trillion in loans, while public sector banks gave ₹2.3 trillion in loans. In comparison the total amount of loans in 2011 which stood at ₹40.8 trillion, public sector banks had a share of 74.9% and private sector banks around 17.8%.
The one segment that we would expect public sector banks to not loose out one is deposits. Especially after considering the security of deposits it to be one of their USP’s. But unfortunately over the last few years, public sector banks have lost market share here too. As of 2011 the total amount of deposits in the Indian banking system stood at ₹53.9 trillion, public sector banks had a share of 74.6% in it. The share of private sector banks was a little over 18%. By 2019 the total amount of deposits in the Indian banking system stood at ₹125.6 trillion. Of these Public sector banks had 63.1% of these deposits and private sector banks 28.7%.
— Non-Performing Assets (NPA)
One would expect private banks to have a high number of NPA’s considering that in order to gain an edge over public banks the private banks may be more approachable when it comes to loans, leading to higher NPA’s. But this has not been the case as the NPA’s of private sector banks have been lower in comparison to private banks.
In the 5 years leading up to 2018, the NPA’s of private sector banks increased from 0.7% in 2014 to 2.4% in 2018. Figures that seems reasonable in comparison to that of the private sector where the NPA’s rose from 2.6% in 2014 to 8.00% in 2018 and have been increasing since then.
It is evident that although the public sector still holds a greater market share they have not been able to compete with the growth rate of private banks. In order to achieve this, Private banks have capitalized on the weaknesses of Public Banks. Coupling superior customer service with the inclusion of technological changes has worked out in favor of the private banks. It is good to see that these measures adopted by private banks are forcing the public banks to implement them too.
But if the public banks keep playing catch up with the private banks they will soon be seen falling behind even in terms of market share. This has called for multiple structural reforms to ensure that does not happen because at the end of the day it is the public banks that look after and perform in the interest of the economy.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
